How Cheap Oil Derailed Shell’s Arctic Oil Exploration Effort

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Michael Bastasch DCNF Managing Editor
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Royal Dutch Shell announced it was halting its exploration for oil off the Alaskan coast Monday. But this shouldn’t be too surprising given that low oil prices make it much less attractive to spend billions on oil and uncertain Arctic plays.

Shell said it “found indications of oil and gas in the Burger J well, but these are not sufficient to warrant further exploration in the Burger prospect.” The announcement excited environmentalists who opposed Arctic drilling in the first place, but rather than a political victory reached by activists, low oil prices are to blame for Shell’s halting operations.

“Shell says they didn’t find enough oil,” David Kreutzer, an economist with the conservative Heritage Foundation, told The Daily Caller News Foundation. “However, at current prices they may not be willing to look too hard.”

“Had they gotten the go ahead a few years ago, maybe they might have been willing to explore a little further,” Kreutzer added.

Shell has been trying to get approval to explore the Arctic Ocean for potential oil and natural gas reserves since 2008 when oil prices were at record-high levels. The region is estimated to hold “90 billion barrels of oil, 1,669 trillion cubic feet of gas, and 44 billion barrels of natural gas liquids,” according to U.S. Geological Survey figures.

Shell spent $2 billion in a 2008 federal lease sale to drill in the Arctic, but initial efforts to explore the region were hampered by lawsuits, regulations and the BP oil spill (which resulted in all offshore drilling being halted). Shell finally got approval from the Obama administration to look for Arctic oil in 2012, but operations were again halted in early 2013 after a drilling rig ran ashore during an intense winter storm.

Shell, however, kept pushing to explore for oil. With oil prices hovering above $90 per barrel throughout 2013 and into summer 2014, Arctic drilling was still an attractive endeavor. But something happened in July 2014 — oil prices collapsed.

Source: The Energy Information Administration

Source: The Energy Information Administration

From July 2014 to January 2015, oil prices fell from above $100 a barrel to around $50 a barrel. Prices recovered somewhat through June 2015, but fell again in recent months. Shell, which had already invested billions in its bid for Arctic oil, only got the approval to drill from the Obama administration in May — when oil prices were nearly half of what they were the previous year.

Shell jumped at the opportunity to once again explore for oil in the region, repairing its damaged rigs and implementing all of the regulatory requirements handed down by Obama’s Department of the Interior. The Wall Street Journal notes, however, that Shell’s investors weren’t too thrilled with the company’s decision.

Investors weren’t keen on facing a multi-billion dollar loss in this endeavor, especially with oil prices so low. The WSJ notes that investors are “more focused on cost-cutting than reserve-building in the current price environment.”

“Investors don’t want Shell to deliver more capex into Alaska,” Bernstein research analyst Oswald Clint told The WSJ. “I imagine investors will be OK with a $1 billion hit versus tens of billions in the future.”

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